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Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently [Hardcover]

Riccardo Rebonato
4.5 out of 5 stars  See all reviews (11 customer reviews)

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Book Description

October 7, 2007 0691133611 978-0691133614

Today's top financial-risk professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading--and it puts us all at risk. This is the case that Riccardo Rebonato makes in Plight of the Fortune Tellers--and coming from someone who is both an experienced market professional and an academic, this heresy is worth listening to.

Rebonato forcefully argues that we must restore genuine decision making to our financial planning, and he shows us how to do it using probability, experimental psychology, and decision theory. This is the only way to effectively manage financial risk in a manner congruent with how human beings actually react to chance. Rebonato challenges us to rethink the standard wisdom about probability in financial-risk management. Risk managers have become obsessed with measuring risk and believe that these quantitative results by themselves can guide sound financial choices--but they can't. In this book, Rebonato offers a radical yet surprisingly commonsense solution, one that seeks to remind us that managing risk comes down to real people making decisions under uncertainty.

Plight of the Fortune Tellers is not only a book for the decision makers of Wall Street, it's a must-read for anyone concerned about how today's financial markets are run. The stakes have never been higher--can you risk it?

Editorial Reviews


"[Plight of the Fortune Tellers] was written to appeal to a wide audience. Stylistically, Rebonato is an engaging writer who uses analogies and interesting examples...I'm confident you'll enjoy this book and that, after reading it, you will join in the dialog that Rebonato has started."--Garp Risk Review

"In his new book, Plight of the Fortune Tellers, Rebonato shows... why Merrill Lynch and Citigroup shareholders are right to be concerned. Nowhere have I read a better account of how a conscientious, intellectually disciplined market risk manager approaches his work in today's complex world. Well known to Risk readers as a master of interest rate modeling, Rebonato has written an accessible, non-technical book."--Nicholas Dunbar, Risk

"In Plight of the Fortune Tellers, Rebonato analyzes and offers solutions to problems related to quantitative risk management strategies and the value-at-risk (VAR) methodology currently used by financial managers. Through stories, examples, theory, and practical methods, he first provides a critical review of the current state of affairs in investment risk management. Then, he proposes how we should 'revisit our ideas about probability in financial risk management' and 'put decision making back at center stage.' In Plight of the Fortune Tellers contains valuable insights into the development of VAR methodology and problems associated with its use in the present financial management arena. . . . In Plight of the Fortune Tellers is a book recommended for practitioners currently involved in quantitative methods and for students of investments and risk management at the graduate school level."--James Jackson, CFA Digest

"This is an enjoyable, approachable book that may be read by anyone with an analytical mind. It is free of mathematics, yet it makes no concessions when it comes to explaining the complexities of a problem...I found a flowing prose that was a pleasure to read...[P]light of the Fortune Tellers is a great wake-up call for the industry. It deserves to be widely read since we all would like to be able to rely on the stability of the financial sector. It would be nice to get the risk management right."--Jessica James, Physics World

"Remember that feeling of bewilderment after your first few weeks in your first job after university? That wrenching realization that, while the theories that you had laboured to understand may have been illuminating, they were too abstract to be applied to the real world? Reading Riccardo Rebonato's intriguing book brings those memories flooding back. For while Rebonato well understands, approves of, and writes about quantitative probability and risk theory, his day job involves actually managing financial risk. Hence he appreciates the limits both of theory and of applying it to real world situations. . . . There is considerably more meat in this wise, practical, yet unpretentious book than can be summarized in a short review."--John Llewellyn, The Business Economist

"Riccardo Rebonato is a better fortuneteller than the risk analysts he writes about. He has read the palms of the 'quants' who revel in developing ever more complex risk models and found that their 'real life' line is rather short. But apart from confirming the prejudices of a financial journalist with no statistical training, is this book worth reading? The answer is yes. It is timely; the subject--financial risk management--matters hugely; it provides a relatively accessible guide to annoyingly influential statistical theories; and it makes you think."--Financial World online

"Plight of the Fortune Tellers is insightful and entertaining. It provides a non-technical yet sophisticated introduction to the perils of modern risk management and it has the potential to lead us in a better direction. Don't miss it."--Lisa R. Goldberg, Journal of Investment Management

"This book should be on the reading list of experienced risk managers in the financial services industry as well as students who are contemplating a career in the field. It provides a thoughtful qualitative companion to more equation-laden texts on modern risk management."--Moshe A. Milevsky, Journal of Pension Economics and Finance

From the Inside Flap

"A fascinating book that very comprehensibly covers the evolution of risk management. Very interesting perspective, accessible to all--from experienced market practitioners to interested beginners."--Jonathan P. Moulds, Bank of America

"While others build straw men only to tear them down, Rebonato stands on the intellectual foundations of his profession to both articulate its weaknesses and suggest a plan for material advancement. This he does with respect, precision, and humor, making Plight of the Fortune Tellers a welcome oasis in the desert of dry risk management texts."--David Shimko, Towers Perrin

"Riccardo Rebonato provides a refreshingly clear and skeptical analysis of the limitations of quantitative risk management, the naveté of too many decimal places, and the sloppy ways in which people talk about probability."--Emanuel Derman, Columbia University, head of risk at Prisma Capital Partners, and author of My Life as a Quant: Reflections on Physics and Finance

"This is a unique book: a treatise on risk management with no equations! Since equations are frequently substituted for thought in this area, the book is long overdue. Riccardo Rebonato is one of the leading technical writers in this area, and now brings his experience to bear on the elephant in the room of risk management: do the equations do what their advocates claim? All will benefit from Rebonato's insights, including his proposals for how to reform risk management."--Ian Cooper, London Business School

"In this elegant and controversial book, the author discusses and rejects the current paradigm of quantitative risk management. Rather than the traditional frequentist methods, he advocates using probabilities-as-degree-of-belief and probabilities-as-revealed-by-actions as better approaches to decision making under financial uncertainty. General readers as well as risk-management professionals, students, and academics will find this book exciting and illuminating."--Alexander Lipton, managing director, global head of credit analytics, Merrill Lynch International

"An extremely timely book that will no doubt cause a stir. It is a reality check that carries great authority because of the author's experience and position in the industry and his knowledge of both the business end and the technical side. This is a well-written, entertaining book that will generate a lot of debate in the financial industry about the future of quantitative risk management."--Alexander J. McNeil, coauthor of Quantitative Risk Management

"Very engaging and in places quite provocative. This book will be a wake-up call for the financial risk management industry. Certainly a good read."--Lane Hughston, King's College London

Product Details

  • Hardcover: 304 pages
  • Publisher: Princeton University Press (October 7, 2007)
  • Language: English
  • ISBN-10: 0691133611
  • ISBN-13: 978-0691133614
  • Product Dimensions: 0.9 x 6.5 x 9.3 inches
  • Shipping Weight: 11.4 ounces
  • Average Customer Review: 4.5 out of 5 stars  See all reviews (11 customer reviews)
  • Amazon Best Sellers Rank: #1,372,815 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews
22 of 22 people found the following review helpful
5.0 out of 5 stars Timely and insightful; best of its kind! December 5, 2007
In my opinion this is the most valuable book on investment risk management of the past few years. Yet, no equations! However, with cogent arguments and literate prose, Rebonato lays out a case against the unfortunately prevalent misuse of statistical models in risk management.

Second edition should fix the minor annoyances, like "manger" for "manager" (appearing several times) and "form" for "from" (ditto), but the content should be read by everyone with interest in the area.

Especially welcomed are his arguments. Rather than setting up straw swans and knocking them down, or simply labeling alternative views as offensive or idiotic, he carefully sets out deep background for thinking about risk, and for thinking about probabilities, then shows how and why the well-meaning (and useful in the right context) VaR ideas are on a trajectory that is likely to go horribly wrong.

What to do? Unfortunately, the problem is hard and there are likely no easy solutions. But thinking correctly (my word) about the problem lets us roll up our sleeves and work on the right parts of the problem.

Investment management is all about risk management. We want to understand the risks in front of us, accept the risks we think we can get paid properly for, and avoid the ones where the bet is not in our favor. The Rumsfeldian "unknown unknowns" are the ones that are likely to cause the most damage. Those are what should keep us up at night trying to imagine. If they become "known unknowns", e.g. liquidity and linkage risks which showed up July/Aug 2007, we can get to work understanding and managing them.

Best (financial/investment) book of the year.
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14 of 16 people found the following review helpful
5.0 out of 5 stars A Challenge to the Quants October 19, 2007
Rebonato challenges the "frequentist" approach to probabilities employed by stock analysts and rating agencies and finds lots to worry about. He says that although looking back at the past gives you masses of data that can be parsed and analyzed lots of different ways, it gives a dangerously miselading sense of security that future probabilities can be systematically determined with great prescision. The problem is that that whole thing is based on the idea that market moves are like coin flips, or monte carlo simulations, which say that while market prices change and fluctuate, that their underlying structure never actually changes. In fact, the probablities that really count are the those in the future, not those of the past. To predict those you need to understand what Rebonato dubs "subjective probability" - which while much more qualitative as opposed to mathematical, can actually be much more accurate and predictive. This is well worth thinking about, and is clearly explained for you to make your own judgment.
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4 of 4 people found the following review helpful
Format:Hardcover|Verified Purchase
The main theme is that risk management is not about measuring risk, or assessing probabilities, but it is about making decisions under uncertainty. The author says that the existing framework of risk management, which is heavily based on "frequentist" approach to probabilities (i.e. repeatability under identical conditions, weak prior beliefs, etc.) does not necessarily serve for decision-usefulness associated with managing risks; "subjective" (Bayesian) probabilities tend to be better suited to the purposes. Focusing on the outcome of decisions relieves us from dogmatic probabilists and allows us eclectically to arrive at the best prediction we can, using whatever tool we have at our disposal. While the author's argument appears to make a lot of sense, the Bayesian probabilities brings in subjectivity such as prior information/knowledge, which in itself seems helpful, I wonder what if we are not confident of such prior information, as we cannot know what we cannot anticipate (i.e. an "unknown unknown": an uncertainty that is unanticipated)? Or put it differently, if we already have had good, reliable prior information about whatever the risk we attempt to assess, then, we would not have much to worry about to begin with, I presume..... Well, we probably should not try to rely on statistical approach to such an extremely high percentile to be considered effectively meaningless (I hasten to throw in my disclaimer here that I am not proficient enough in statistics to discuss the matter in detail!)
Those who have found Nassim Nicholas Taleb's "The Black Swan" and "Fooled by Randomness" fascinating would be intrigued by this timely, engaging , and highly accessible account, which provides not only professional risk managers but also amateur investors like me with numerous insights.
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16 of 21 people found the following review helpful
4.0 out of 5 stars Very interesting and important November 8, 2007
Format:Hardcover|Verified Purchase
This book is one of the many that have come out in the last few years that has addressed the virtues and vices of financial modeling. Many of these books are devoted to the proposition that modeling has caused deep problems in the financial markets, but the evidence they present for this assertion is typically very weak. Considering the scale of modeling in financial institutions throughout the world, it would be naïve to assume that modeling has not influenced the markets, but it would also be unjustified from an empirical standpoint to say that modeling has been the predominant influence in market degradation. But if one believes that modeling has played the major role in this regard, then there will be a strong temptation to seek alternative methodologies for optimizing the risk/return trade-off.

The author is one of these, as can be ascertained early on in the book where he refers to data as giving "power to actions and decisions." However, the author is aware of the problems with the misguided imputation of power to concepts or ideas that are applied to contexts that are extremely rare in human experience. Thus he devotes several pages of the book to the "frequentist" interpretation of probability, and offers the Bayesian alternative. This is not to say that the frequentist approach should be completely discarded, for he discusses contexts where it is appropriate. One of these concerns the need for say a 99.9 percentile in some implementations of the Basel II accords. Such a level of confidence will be very problematic from the standpoint of validation given the paucity of real historical data. The author also offers suggestions for how risk managers are to clean up their act in the final chapter of the book.
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Most Recent Customer Reviews
5.0 out of 5 stars EXCELENT book on Bayesian statistics, frequency statistics, risk, and...
This is a truly EXCELENT book on Bayesian statistics, frequency statistics, risk, and uncertainty.
It has clarified my thoughts on my own research. Read more
Published 16 months ago by O. R. Thomas
4.0 out of 5 stars A shot of COMMON SENSE to quants
Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently (New in Paper)
I am a student of finance and banking, and am very interested in the matter of... Read more
Published on November 21, 2011 by Juan Rogelio
4.0 out of 5 stars An interesting book on finance and risk
Riccardo Rebonato wrote Plight of the Fortune Tellers in a way that is accessible to a relatively wide readership. Read more
Published on September 6, 2011 by Ian Kaplan
4.0 out of 5 stars Important review of goal and premise of risk management
This book was an early warning to the professional risk management teams of banks about what is predictable and to what confidence intervals events can be realistically viewed... Read more
Published on July 18, 2010 by A. Menon
5.0 out of 5 stars For engineers & scientists as well as financial managers
This book should be required reading for every probstat course. It is intended for financial managers primarily; as such the formal math has intentionally been limited to basics. Read more
Published on January 3, 2010 by Curmudgeonly Cur
5.0 out of 5 stars Thought-provoking study of risk management
Reading this book is like reading the prophecies of Cassandra, whose fate was to speak the truth to the unbelieving. Read more
Published on September 1, 2009 by Rolf Dobelli
4.0 out of 5 stars The future repeats the past.
I have long like the insight of Bernstein, doctor turned author. If you like understanding how world business evolves on a very long time scale, then you will like this book. Read more
Published on May 29, 2008 by John K. Bassett
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